Introduction Individuals supply factors of production. Firms demand factors of production: Use inputs to produce output. Supply output to individuals. All prices and quantities depend on two things: Technology available to firms. Taste of individuals. Study of individual labor curves. Discrimination in the labor market.

Individual labor supply Section 16.1 Individual labor supply

Individual Labor Supply Consumption versus Leisure. Labor is working in marketplace for going wage. Leisure is all other activities. Consumption is all goods other than leisure. Most often measured in dollars. Indifference curves can be drawn between leisure and consumption. Slope is the marginal value of leisure, measured in terms of consumption.

Landsburg, Price Theory, 8th edition

Individual Labor Supply Nonlabor income: income from sources other than wages

Change in Wage Rate Change budget line Changes in nonlabor income Changes in wage rate

Landsburg, Price Theory, 8th edition

Change in Wage Rate Change budget line Changes in nonlabor income Changes in wage rate

Income and Substitution Effects Wage increase has substitution and income effect. Substitution effect: Leisure hours more expensive so workers choose less leisure and supply more labor. Income effect: Workers choose more leisure and supply less labor. Either can dominate so worker may supply either more or less labor.

Two income effects The B.C. is C +wL= Y + wT At previous wealth level expressed as consumption, Y+w1T, the total amount of consumption or leisure that can be purchased is lower at new ‘costs’: C+w2L (1st income effect) New wage increases wealth to Y+w2T, increasing wealth (2nd income effect)

Worker’s Supply of Labor Deriving labor supply curve: Curves slope upwards at low wages due to dominance of substitution effect over income effect. Curve bends backward at higher wages reflecting the dominance of income effect over substitution effect. Using labor supply curve: Changes in wage rate causes movements along the supply curve. Changes in other things, such as nonlabor income, shifts the curve

Worker’s Supply of Labor Can have backward bending curves Another argument states puts weight on non-labor income See Figure 16.7

Landsburg, Price Theory, 8th edition

Labor market equilibrium Section 16.2 Labor market equilibrium

Labor Market Equilibrium Sum single individual’s labor supply curve Obtain market labor supply curve Recall that market demand curve coincides with MRP Put together, obtain equilibrium Assume upward-sloping labor supply curve For an individual, the labor demand curve is a horizontal line.

Changes in nonlabor income Marketwide increase in nonlabor income can lead to either an increase or decrease in any individual’s working hours. Average worker must work less because total quantity of labor supplied must fall.

Changes in marginal productivity Workers can be made more productive by technological advances. Value of capital increases. When there is a temporary opportunity to earn high wages workers rush to take advantage of it. Behavior is known as intertemporal substitution. Because of this, a temporary increase in productivity has a much bigger impact on employment than a permanent increase in productivity.

Temporary changes A temporary change in productivity leads to additional hours during temporary periods of high productivities. This is called intertemporal substitution

Section 16.3 Differences in wages

Differences in Wages Wage differences in the US are persistent

Differences in Wages Wage differences in the US are persistent

Explanations Human capital When a supply of labor is considered, an entire package of productive skills are covered. The entire set of skills can be viewed as a form of capital Human capital can be regarded as a fixed factor, which is hard to change in the short run. Payments to human capital are a form of rent, but free entry implies zero rent unless people have various endowments that make different the returns of education.

Aside: Education as a consumption Undoubtedly, education is partly investment and partly consumption One possible reconciliation for “over-education” is that higher education itself is a pleasure. Subsidizing higher education can be justified if it casts a positive externality, but not if it is a consumption.

Explanations Discrimination Tasted based discrimination vs Statistical discrimination However, it is generally difficult to distinguish the two forms of discrimination empirically. A lot of evidence of discrimination Discrimination can be eliminated by competition (Gary Becker)

Explanations Psychological attributes and preferences Risk attitude attitudes towards competition attitudes towards negotiation Social norms Social identify and self identity Socialization and child-rearing practices are two drivers of social norms

Welfare difference Stevenson and Wolfers (2009) find that, despite decades of educational gains and an unambiguous enlargement of their set of labor market opportunities, women’s self-reported levels of life satisfaction appear to have declined over time, both in absolute terms and relative to men’s.